What on earth is the crisis in Ukraine really all about? Those were not pro-Russian separatists in action in the Crimea. They are mainly Russian security forces. Now we see similar things happening in eastern Ukraine. What about the shooting at the weekend that is jeopardising the recent peace deal. Who did that?

If so what is Russia trying to achieve? Is bagging parts of the near bankrupt Ukraine for Russia such a prize? Could it not be that the real objective is to weaken its major global rivals by inducing another global financial crisis as more aggressive sanctions backfire?

New sanctions coming

Make no mistake that is what heavier sanctions on Russia would achieve. The S&P 500 would not be at its current levels. We would be living in a very different world. This would be a real life stress test for an overleveraged Western financial system inflated by five years of money printing.

Is that what Russian president Vladimir Putin has in mind? Teach the West a lesson by crashing its financial markets? If so then he has made a calculation that the impact would be assymetric with Russia coming out far less damaged than the Western powers, and therefore in an enhanced position in relative terms. Mr. Putin is no fool.

Still this would be quite a gamble. Russian stocks and the ruble have been big losers in the crisis thus far. If Russia invades eastern Ukraine at the ‘request’ of the local population – now on the receiving end of a powerful propaganda machine – more sanctions would be inevitable. Russian banks could be shut out of the dollar settlement system.

Financial warfare can be conducted at the geopolitical level. A report in The Daily Telegraph today notes: ‘China also tipped off Washington when Mr. Putin proposed a joint Sino-Russian attack on Fannie Mae and Freddie Mac bonds in 2008, aiming to precipitate a dollar crash…’

‘Princeton professor Harold James sees echoes of events before the First World War when Britain and France imagined they could use financial warfare to check German power. He says the world’s interlocking nexus means this cannot be contained. Sanctions risk setting off a chain-reaction to match the 2008 shock.’

Bigger than Lehman

He writes in Project Syndicate: ‘Lehman was a small institution compared with the Austrian, French and German banks that have become highly exposed to Russia’s financial system. A Russian asset freeze could be catastrophic for European – indeed, global – financial markets’.

British finance minister George Osbourne warned the City of London last week to prepare for the impact of new sanctions. Rising share prices since then suggest nobody has listened. Gold is also down when it should be up.

Of course this is jumping several guns. But you do have to ask why Russia is really interested in the Ukraine? Is this simply an assertion of strongman control over Russia’s borders? Is this just a lesson for other countries that border Russia to behave?

Or is this a way to hit the West right where it hurts, in financial markets that are over-inflated by money printing since the last global financial crisis? Who is the most powerful man in the world today? Vladimir Putin?

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